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What connection is there between the points on the curve of efficient allocation of resources and points on the production possibility frontier






This example of a Production-possibility frontier provides a simple example for illustrating Pareto efficiency. Suppose that there are two agents in an economy, one that only values guns and one that only values butter. Point A is not Pareto efficient because it is possible to produce more of either one or both goods (Butter and Guns) without producing less of the other. Thus, moving from A to D enables you to make one person better off without making anyone else worse off (Pareto improvement). The locus of the point D is a curve BC, representing the limits of the current production efficiency. However, the curve BC is not in itself Pareto efficient. Moving to point B from point A, is not a Pareto improvement, as less butter is produced. Likewise, moving to point C from point A is not a Pareto improvement, as fewer guns are produced. However, the arc EF, joining points E and F on the frontier curve is Pareto efficient within the achievable limits of current production capacity, with respect to A, i.e., only the arc whose endpoints are created by the lines perpendicular to the co-ordinate axes subtended from the point A and extended to meet the said curve at the respective endpoints, is pareto efficient.

 

 






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